We've argued before on these pages that Microsoft should build its own smartphones. The real money in the smartphone market doesn't come from licensing an operating system, as Microsoft does with Windows Phone, or apps, as Google does on Android. It comes from building smartphones for $300 and selling them to carriers and consumers for $600.

Microsoft, however, went for the traditional licensing route with Windows Phone 7, and until recently, it looked like the company was sticking to the same formula for Windows Phone 8, with Samsung, HTC, and Nokia all unveiling forthcoming Windows Phone 8 devices.

But a number of rumors suggest that this may be changing. China Times, Boy Genius Report, and WPCentral are all claiming that Microsoft is working on its own high-end smartphone, to be sold with the same Surface branding as the company will use on its forthcoming tablets.

Taken together, the rumors say that the Microsoft smartphone will come out some time in 2013, and that the change in strategy is due to Windows Phone's failure to acquire market share, or perhaps discontent with the way Nokia's "Lumia" brand appears to have gained better traction than the "Windows Phone" brand. The final decision to go ahead with the Surface phone will supposedly rest on the success (or otherwise) of the Windows Phone 8 handsets that will be released later this year (though exactly when they'll come out remains a mystery, due to Microsoft's continuing secrecy about the new operating system).

We can't speak to whether these rumors are true or not, but it's worth considering the implications they have if there is indeed a kernel of truth behind them. As supportive as we are of Microsoft building its own phones in general, this seems like a bad way of doing it. We don't doubt that Redmond could produce a desirable piece of hardware—for example, something bringing the VaporMg finish to a smartphone. We're just struggling to see how it would improve Windows Phone's position in the market.

The Surface tablet makes sense for two reasons. First, because the PC market is awash with mediocre, poorly designed machines, and Microsoft needed to ensure that there was at least one system that looked good and showed off Windows 8 at its best. The Surface tablets are flagship devices, something that Microsoft simply couldn't trust the OEMs to produce.

With the many weird Windows 8 devices shown at IFA in August, it looks like Redmond's decision was probably a wise one, too; while there will certainly be some interesting designs hitting the market later this month, none of them really stood out as flagships.

Second, the PC OEMs have their backs against the wall. If they don't preinstall Windows on their systems, they're going to struggle to sell any PCs. Microsoft knows this, and it gives the company the ability to compete with the OEMs head-to-head without worrying too much that they'll drop out of the market altogether. That's just as well, too, because Microsoft needs those OEMs to provide volume shipments.

Smartphones: they're not PCs

The smartphone market is in a different position.

Windows Phone has certainly struggled. The first iteration of the software, released almost two years ago, held promise, but lacked important features. The early hardware was nothing special, either, with nondescript phones that did little to stand out.

But things have, slowly, been heading in the right direction. Windows Phone 7.5 fixed most of the functional omissions of the operating system, and Nokia's devices have a certain visual flair, setting themselves apart from the plethora of black slabs that permeate the smartphone market. Market share is still lower than Microsoft and its partners would like, but it seems to be heading in the right direction: market research firm Kantar Worldpanel says that in the 12 weeks ending September 2nd, 2012, Windows Phone was taking 5 percent of sales in the EU's top five markets (Germany, UK, France, Italy, and Spain), up from 3.8 percent in the same period in 2011. This growth seems to be stimulated by Nokia's range of devices.

Windows Phone 8 is still something of an unknown quantity, but the fault here is all Microsoft's. What we do know is that, while Samsung's design, the ATIV S, doesn't buck any smartphone trends, the new Nokia Lumia 820 and 920 and HTC 8X and 8S are all strikingly different and good-looking handsets that will stand out in retail. Although Nokia's handling of the matter has been nothing if not cack-handed (though Microsoft's software situation may have been a contributing factor here), the Lumia 920 also boasts a standout camera that will give it unique appeal.

So as best we can tell, the OEMs are doing their part, and doing it well. This isn't to say that the various handsets will fly off the shelves when they go on sale, necessarily, but they are at least very credible offerings. The Lumia 920, in particular, can stand as a genuine flagship device, and the HTC 8X shapes up pretty well, too. If they don't sell, it won't be because they're under-specified, under-powered, or unattractive.

In other words, there's no need for Microsoft to come in with a "Surface Phone" to shake up the OEMs and force them to up their game. They've upped it themselves.

Second, the smartphone OEMs are not captive in the way PC OEMs are. Samsung could drop Windows Phone and it's unlikely that the dent it made on the company's sales figures would even be detectable. Android is the Korean firm's bread and butter. HTC's position isn't as strong as Samsung's, but it's still the case that its Windows Phone business is small beer. If Microsoft pushes these companies in a way they don't like, they can easily respond by dropping Windows Phone entirely, and in so doing, reducing its carrier and retail availability.

Nokia's situation is of course different. Publicly, at least, it has no plan B, no alternative should it wish to abandon Windows Phone. If Redmond decided to squeeze the Finnish company out of the market, it'd probably be the final nail in its coffin. While Microsoft would no doubt love to pick up Navteq on the cheap, it's hard to see just how such a move would improve Windows Phone's market position—it'd just put an end to the interest and recognition that is slowly growing.

Microsoft may be aggrieved that it's "Lumia" that people want, not "Windows Phone" but it's hardly surprising that Nokia has focused on its own branding, given the way "Windows Phone" is still routinely linked to "Windows Mobile" by retail personnel. Why would Nokia want to deliberately weigh down its own products by hanging that boat anchor on them? The brand name hardly matters to Redmond's revenue, anyway; Android is on plenty of smartphones, even if the brands that users care about are (Verizon's) Droid and (Samsung's) Galaxy. And it's not like hurting "Lumia" will mean that consumers ask for "Windows Phone" instead. It will mean they just ask for "iPhone" or "Droid" or "Galaxy" in even larger numbers than they already do.

Unlike the Surface tablet, a Surface phone is unlikely to improve the quality of devices available on the market, and it's going to drive other OEMs away from Microsoft's operating system. In turn, this will further diminish Windows Phone's retail visibility and carrier connections. None of these things could possibly help Windows Phone.

Similarly, the things that do hurt Windows Phone—a persistent lack of both "big-name" applications (Where is Instagram? Where is Angry Bird Space?) and "real world" applications (you can be sure that if a bank, retail store, or sports team has a smartphone application at all, then it will have an iOS version; it almost certainly won't have a Windows Phone one), weak advertising, limited in-store promotion, and, for Windows Phone 7.5, hardware that fares poorly in bullet-point spec comparisons—aren't in any way improved by the shipment of a Surface Phone.

A Surface Phone fixes nothing. On the contrary; the disruption a Surface Phone would cause to Nokia's name and carrier connections (outside the US) would tend to further diminish promotion and marketing of the platform, and make developers even more reluctant to gamble on it.

One possibility that might avoid these OEM and carrier difficulties would be a limited-availability Surface Phone, similar to Google's various Nexus phones. That is, Surface Phone wouldn't be a mainstream, mass-market device, but a limited, unsubsidized option targeted especially at developers and enthusiasts.

But that doesn't make much sense for Microsoft. Google's situation with Android was different. First, Google needed to raise the Android hardware bar, which the Nexus 1 arguably did. Second, Google needed a range of handsets that it could guarantee had access to the latest version of unadulterated Android, to give developers something to target. The Windows Phone OEMs have done the former all on their own, and the OEMs and carriers simply can't alter the Windows Phone operating system the way Google OEMs and carriers can. While there have been delays and limitations in the availability of software upgrades, these limitations have been entirely under Microsoft's control, and in any case, the company promises that it will be different (and better) with Windows Phone 8 anyway.

Windows Phone simply doesn't need a Nexus device.

When it comes to revenue, building its own hardware is still Microsoft's best long-term option. If the OEMs were being useless, if there were no name recognition or relationships around Windows Phone at all, then building its own phones would clearly be Microsoft's best short-term option, too. Similarly, if Windows Phone were so successful that entering the market wouldn't scare off Samsung, HTC, and Nokia, then building its own phones would be a good option for Redmond. And if it were still 2010, building its own phones would have let Redmond veto cheap materials and flimsy construction, and also ensure that Windows Phones weren't merely minor variants of existing Android models: it would have been an appealing option back then, too.

If, however, things remain on the trajectory they're currently on, with Windows Phone as a small but growing player, a Surface Phone would be a spectacularly bad idea. It would address none of the problems faced by Microsoft's operating system, and would nip the limited successes in the bud.

If, however, things remain on the trajectory they're currently on, with Windows Phone as a small, but growing, player, a Surface Phone would be a spectacularly bad idea. It would address none of the problems faced by Microsoft's operating, and would nip the limited successes in the bud.

I actually quite liked my Zune - easily the best MP3 I've ever owned if playing MP3s is your goal. I have an iPod touch now (after I broke through clumsiness three Zunes [first, second and third generation]) and accept that it's a superior device, but does mp3s worse than the Zune. That being said, I've also owned a few Microsoft OS phones and they've been awful. I think Microsoft has the potential build an amazing device, but it will be an uphill climb (although the idea of Androids, iPhones and MS phones being built in the same factory by the same contractor is pretty funny).

I'm a fan of the platform. I've really enjoyed my Samsung Focus and would definitely be interested in an MS device for my next phone.

But I think this article is right on. It feels like Nokia and HTC are headed in the right direction as far as building brand recognition and a little excitement for WP devices. MS needs to at least see their partners get off the ground before jumping into direct competition.

Or maybe they're just gonna make an essentially pointless low-volume Nexus-type device as suggested. That'd be fine with me.

ok. so since last year windows phone gained 1.4% market share in europe.

since thats nokia's home turf it's probably mostly lumia.

meanwhile nokia lost another 10% market share, becuase last year they we're still selling symbian 'smartphones'.

so no i am not inclined to see an increase in windows phone adoption. all i see is the last breath of nokia's once allmighty brand (at least five years ago in europe). there are always those sticking to their brand. be it nokia, apple or microsoft.

Peter, great article, I've been thinking the same thing since the recent rumors of a surface phone started popping back up in multiple places (like its for real) again - I'd been getting excited about WP 8 and this aspect has made me sit back and take pause.

If I was Nokia - in some back room lab I would have current working Android ROM's for all the Lumia handsets (like Apple did with OS X and Intel builds from the beginning when they were on PowerPC) - with the ability to download and install over the internet. And if the Surface phone turns out to be confirmed, if I was Nokia, I start offering Android versions immediately (they'd sell a ton more doing it).

Microsoft, in its history, has often screwed over various "partners" for its own ends....as the scorpion said "it's in my nature...", so in the end this story isn't too surprising.

On a different note, the serious prospect MS is bringing a surface phone to market makes the prospect of getting a WP 8 phone less desirable (that Microsoft is about to Zune these guys who are striving to help it is extremely distasteful) both from a user and programmer aspect (my gut reaction is screw them...).

Here is another difference between tablets and smartphones. The phone makers know how to make good smartphone hardware. The PC makers, have no experience in building tablets, since they have never done it before.

I'm seriously considering getting a Surface of some variety for my house. I'd love to have a matching phone...but unless there's a serious problem in the WP8 sales, and Microsoft needs to become the sole vendor...well, I agree that going off solo isn't the proper solution.

MS making a phone isn't a good idea for us. I am not a millionaire investor. I use products and services like most people. Monopoly companies are not good for me. They will just run the other companies out of business then jack up prices once I don't have options.

I will never cheerlead this process and I don't understand others that do.

I'm seriously considering getting a Surface of some variety for my house. I'd love to have a matching phone...but unless there's a serious problem in the WP8 sales, and Microsoft needs to become the sole vendor...well, I agree that going off solo isn't the proper solution.

Now, a "Surface" branded phone (stock OS) made by Nokia? Yes, please.

There's no such thing as a "non-stock" OS with Windows Phone. The only customization allowed is preloaded carrier or device manufacturer apps that can be uninstalled like any other.

I'm seriously considering getting a Surface of some variety for my house. I'd love to have a matching phone...but unless there's a serious problem in the WP8 sales, and Microsoft needs to become the sole vendor...well, I agree that going off solo isn't the proper solution.

Now, a "Surface" branded phone (stock OS) made by Nokia? Yes, please.

There's no such thing as a "non-stock" OS with Windows Phone. The only customization allowed is preloaded carrier or device manufacturer apps that can be uninstalled like any other.

Considering some of the "Android" stories I've heard, that's a win right there.

Surface is a flagship device? Seriously? fat ass heavy with keyboard that demands huge amount of space? Yea sounds like an epic design. Especially when you compare it to asus transformer line.

This whole touch everything meme is going to go down in flames as people might be to stupid too fall for the PR but they will notice that using your laptop with touch is not very optimal (not to mention fat finger prints on the glossy screens that already are difficult to see anything on).

If the new MS phone is of equal quality as Surface I don't think that anyone needs to worry about it.

Surface is a flagship device? Seriously? fat ass heavy with keyboard that demands huge amount of space? Yea sounds like an epic design. Especially when you compare it to asus transformer line.

This whole touch everything meme is going to go down in flames as people might be to stupid too fall for the PR but they will notice that using your laptop with touch is not very optimal (not to mention fat finger prints on the glossy screens that already are difficult to see anything on).

If the new MS phone is of equal quality as Surface I don't think that anyone needs to worry about it.

--the real money--It comes from building smartphones for $300 and selling them to carriers and consumers for $600.

Isn't this an overly simplistic way to open the discussion? I won't insult everyone's brains here with a breakdown of why that stance is just plain silly. With that as a foundation, I will hazard a guess that everything that is built upon it is tenuous at best. (and it is late, I skimmed the rest. Too bad if the author retracted it later on, he lost me early)

I'm seriously considering getting a Surface of some variety for my house. I'd love to have a matching phone...but unless there's a serious problem in the WP8 sales, and Microsoft needs to become the sole vendor...well, I agree that going off solo isn't the proper solution.

Now, a "Surface" branded phone (stock OS) made by Nokia? Yes, please.

There's no such thing as a "non-stock" OS with Windows Phone. The only customization allowed is preloaded carrier or device manufacturer apps that can be uninstalled like any other.

Considering some of the "Android" stories I've heard, that's a win right there.

You can deactivate those apps now with 4.0 and above. Some would say that's not far enough, they want it uninstalled just like it would be on the desktop. Problem is, (at least with HTC's android phones), the base OS folders and programs is read only, so you can't uninstall anything built in anyhow.

--the real money--It comes from building smartphones for $300 and selling them to carriers and consumers for $600.

Isn't this an overly simplistic way to open the discussion? I won't insult everyone's brains here with a breakdown of why that stance is just plain silly. With that as a foundation, I will hazard a guess that everything that is built upon it is tenuous at best. (and it is late, I skimmed the rest. Too bad if the author retracted it later on, he lost me early)

Software sells hardware. Apple is the only source of hardware for their software, and thus can charge a premium for it since no one can undercut them with cheap cut down hardware.

I dunno. The Nokia 920 and the HTC models are the first phones in five years or so that actually make me think about jumping off of the Crackberry ship.

9780 owner here + a backup phone that was an HTC one X (that currently is an Nokia 800 temporarily at the moment as i sold my HTC One X so i could get an Motorola razr maxx as i want a phone that can last the day or 2 without making my phone look like a Brick)

i got quite used to blackberry phone now as i only use it for calendar mainly and phone, instant push emails, use Android phone for fun phone (i going to sell the Nokia 800 as just doesn't feel right, the phone is very smooth running, but core apps like ebay facebook twitter and other stuff is lacking, i am quite impressed with the Voice to text as its mostly working very well most of the time)

but i got an year left on the 9780, if i was going to get the 920 or HTC 8 or whatever is around a year from now it will be on T-Mobile UK as Orange UK do not offer more than 1GB of data a month(£50-£60 can get you 2GB but its an rip off), T-mobile UK is ""unlimited"" {probably around 10gb a month hidden limit} for £26 sim only or £36 with phone (24month)

On the one hand I see what this article is saying. On the other hand how much does Microsoft have to lose? Things are getting better but in terms of handsets available but there seems to be no marketing dollars behind them either from the handset makers or the carriers. Microsoft can put a lot of weight behind the platform by marketing their own devices. Phones and tablets are where the growth is, Microsoft may have decided it can't wait around and I'm not sure I can blame them.

I'm seriously considering getting a Surface of some variety for my house. I'd love to have a matching phone...but unless there's a serious problem in the WP8 sales, and Microsoft needs to become the sole vendor...well, I agree that going off solo isn't the proper solution.

Now, a "Surface" branded phone (stock OS) made by Nokia? Yes, please.

There's no such thing as a "non-stock" OS with Windows Phone. The only customization allowed is preloaded carrier or device manufacturer apps that can be uninstalled like any other.

Considering some of the "Android" stories I've heard, that's a win right there.

While I would love a Surface Phone, I have to agree with this article. Perhaps if Windows Phone ever hits somewhere like 10% market share, then Microsoft would have at least a little leverage to keep OEMs building Windows Phones.

Part of what people look at (and what I looked at) from Apple was for the ecosystem to work together, and match. Yes, Nokia manufactured phones might be good enough, but when people are looking for something like a phone that will need to be upgraded to a compatible model. If Microsoft were to call this the Surface, they could have a working ecosystem relatively equivalent to what Apple has. For all the people that don't care about specs or what it really does, and just want to look for the name brand, I think this could be the answer if they do it right. However, you are correct in that it will probably anger the current WP7 manufacturers.

If, however, things remain on the trajectory they're currently on, with Windows Phone as a small, but growing, player, a Surface Phone would be a spectacularly bad idea. It would address none of the problems faced by Microsoft's operating, and would nip the limited successes in the bud.

Yes, hit the nail on the head.

Not sure about all of that. Google has established a two party system in which their first party (Nexus) devices are guaranteed first updates. These devices have served well as both flagships and to give greater exposure to the brand. As premium products, they attract the most enthusiastic and evangelistic customers.

I see a Microsoft phone as a first party exclusive similarly. Most people will go with the subsidy Vibrant, Captivate, or similar, but the true fans will go Nexus for the first party experience. The Surface brand can similarly be built into it's own line of premium first party products.

To say the Surface tablet is necessary, but a phone is not, is to discount the few excellent quality tablets already on the market with similar quality and execution such as a Samsung Series 7 Slate updated to Windows 8 (series 8? same hardware, new OS).

People seem to forget how absolutely huge these markets have become. There is plenty of room for Microsoft to come out with a line of products in each category without poaching their peers heavily. Further, the first party product line creates good guidelines if/when successful, and allows Microsoft to advertise WP8 not on some undefined phone, but instead, advertise the WP8 brand via a complete Microsoft product.

This is much easier for the average consumer to digest. Also, this makes WP8 easier to advertise, because no longer is Microsoft trying to make commercials for some incorporeal software, they are selling a product. When consumers find it's a great product, they are more likely to accept the software identical, but 2nd party hardware product when it is available on better subsidy.

I loved my 3 generations of Zunes and still use the Zune software as my primary PC media player. I never understood why it didn't take off, personally.

For me, it was the fact that it was brown, it's interface was a squircle, and you could squirt with it. The only thing missing was a "tagina" packaging, or a "placentoid" marketing campaign. (I am reffering to the ridiculousness of marketing terms associated with it.)

A) Google Nexus devices predated most other Android devices. Every partner who joined the Android bandwagon knew Google had a "first party" device. I don't think any of the earlier Android devices were particularly good, and Google had great reason to offer a premium device, to point the way for other OEMs.

B) Google did *not* really have a 1st party device; it was designed and built by HTC or Samsung (i.e., those OEM partners that would be competing with any true 1st party device), and I would imagine they see revenue from each device sold -- probably moreso than Google.

C) It was a different time. The first Nexus device was the first "real" Android device, and by the time the second came around, Android had an exploding marketshare, and none of the OEMs would be the least bit worried about the "Google device" sharing their market -- they were growing like crazy.

D) Microsoft doesn't have to come out with its own device to put more into Windows Phone marketing if it wants to.

There's really only one reason to come out with a 1st party WP device: to increase the share of the revenue in the smart device market that comes to Microsoft. And at least initially, barring some miracle explosion in WP marketshet (unlikely), that would mostly come out of marketshare for the OEM partners.

I think Microsoft has the potential build an amazing device, but it will be an uphill climb (although the idea of Androids, iPhones and MS phones being built in the same factory by the same contractor is pretty funny).

That doesn't happen. OEMs typically require box build contractors to maintain separate plants and dedicated staff to isolate their products from competitors and to maintain rigorous IP control. In fact, for most major product releases, contractors have to launch in at least 2 plants (or buildings) with PCBs assembled in one and final assembly in another.

D) Microsoft doesn't have to come out with its own device to put more into Windows Phone marketing if it wants to.

For some reason it seemed logical to me. I mean WP7 isn't a bad OS at all. I would assume WP8 is at least better as a phone OS at this point. Considering that Most of Apple's money is made off iOS devices though and Microsoft currently doesn't have a big chunk of the pie it struck me as a low risk situation. I mean you can practically only go up or leave the market period and I don't think that would kill Microsoft, they have other products anyway.

They certainly need to make an impact. WP8 itself MIGHT do that but as good as WP7 has been reviewed it still hasn't made much splash.

There's no such thing as a "non-stock" OS with Windows Phone. The only customization allowed is preloaded carrier or device manufacturer apps that can be uninstalled like any other.

I know, but I don't want to have to uninstall apps. I'd rather them just not be on the damn device in the first place. It's not a huge deal, but yeah, why would I not want it to be a fresh install.?

FWIW, I can uninstall all of the AT&T apps in about 45 seconds. It's very easy to do.

Most of the Nokia apps are actually quite useful, and provide some brand differentiation vs. other Windows Phone OEMs.

However, it's not entirely true that there is no such thing as carrier customization in Windows Phone. While the carriers can't install any apps or services that can't be easily uninstalled, they *can* choose not to expose certain features, or expose them for a fee. For example, Windows Phone 7.5 (Mango) introduced both visual voicemail and wireless tethering in the OS, but AT&T arbitrarily chose not to expose those features in any first-generation handsets, forcing users into an upgrade.